Interview with Managing Director Mr Björn Blomqvist

Rederi Ab Eckerö, based in the Åland Islands province of Finland, is a company with a diverse portfolio: two ferry lines, a cruise line, a roro cargo tonnage provider and even a bus company. Ferry Shipping News had a question and answer session with Björn Blomqvist, the managing director Rederi Ab Eckerö, in the cargo offices of the company’s Finland-Estonia subsidiary Eckerö Line in Helsinki last week.

Mr Blomqvist, your company has a wide variety of brands involved quite different activities. How do the different subsidiaries “play together”?

We have five different operations: the “original one”, Eckerö Linjen, sailing between Eckerö and Grisslehamn; Eckerö Line operating between Helsinki and Tallinn; the cruise line, Birka Cruises, where we have one vessel out of Stockholm; the roro tonnage provide, Eckerö Shipping; and a local bus company, Williams Buss, on the Åland Islands.

All five are different activities and brands, but also limited companies with their own staff, such as product development, marketing and sales, and are totally responsible for their own profit and loss. The mother company in Mariehamn provides all the ship owning, fleet management and procurement functions, which the daughter companies then make use of.

For the passenger shipping operations, there could perhaps be some kind of synergies or economies of scale from a unified brand, but as long as we don’t have a unified network, it doesn’t really make sense. We have three lines that are not interconnected, and markets that have different main languages. With our way of doing things, the brands and products can be more customized to the respective markets – they are more niche brands, so to say.

In fact, we have had small problems with our existing brands having too similar names. Eckerö Line started out in 1994 as Eestin Linjat, but we changed the name in 1998. We found it very smart at that time, but it does cause occasional confusion when Eckerö Line and Eckerö Linjen sound like they are the same company. This is not a customer problem, because the companies operate in different markets, but it is sometimes an issue on the business to business side, when talking to the authorities, and with the media contacting the wrong company, especially when they want comments quickly.

“It’s not the big fish that eat the small ones – it’s the fast ones that swim away”

Speaking of the different markets, do you find there to be big differences between, for example, Estonian and Swedish passengers?

In general, no. The differences are extremely small, but we are experts on them. We see a lot of differences, we talk about them and we work with them all the time – that’s our job. But really, only Swedes and Finns can see the difference between a Swede and a Finn.

The obvious difference is that there are three different languages [Estonian, Finnish and Swedish], which is normally the only difference “real foreigners” from further away notice. Apart from that the differences are so small that you can quite easily adapt the product. Our different companies can learn from each other and use ideas from one brand in the product development of the others.

Naturally on the three different lines and brands we have some different reasons to travel. Birka for is a pure cruise operation, which makes it more unique for our portfolio. The two ferry lines are very similar to each other, although during the last 18 months or so we have seen a shift towards route travelling between Helsinki and Tallinn.

The day cruise product, with Finns just spending a day in Tallinn, has become relatively less important and we’re seeing a growing volume of one-way travellers, not just local Finns or Estonians but European and Asian tourists. We also have more freight on the Helsinki-Tallinn operation, whereas it’s a much smaller part of the Åland-Sweden operation.

How about the importance of cargo versus passengers on your two passenger ferry routes?

The ferry between Åland and Sweden is a passenger ferry. The car deck is mainly a car deck. Whereas between Helsinki and Tallinn we have a cargo deck.

Between Sweden and the Åland Islands cargo is a nice addition. We have some, especially during the winter season, and we wouldn’t like to lose it. But it’s a very small business. There are big seasonal differences in the passenger volumes and the number of cars they bring with them. Because of this, we can’t allocate a lot of space for freight during the summer high season.

In contrast, between Tallinn and Helsinki cargo very important. It’s not easy to quantify it, and of course a part of it is business secrets. We have an integrated operation, a vessel that always carries both cargo and passengers, so it’s difficult to allocate costs and decide exactly how profitable cargo is and how profitable passengers are.

We know, of course, how much of the turnover comes from passengers and how much from cargo, but if you try to make a decisive calculation about how much profit passengers and cargo make, that’s almost a philosophical question, like the hen and the egg. If we think our vessel is there to carry cargo and allocate all operating costs to freight, then cargo is extremely unprofitable, but passengers make a big profit, because there are no costs left for them. Both parts are very, very important and you can’t separate them from each other.

An old rule of thumb for Finland-Sweden and Finland-Estonia cruise ferries is “one third”: one third cargo, one third passenger ticket sales and one third onboard sales. If you try to get a more precise answer than that, you can keep on analysing forever. There is no one perfect answer.

The two Sweden-Åland operations have tax free sales onboard (due to special status of the Åland Islands within the EU), but Helsinki-Tallinn does not. Is there any big difference between the routes when it comes to onboard sales?

Up until 2004, when Estonia joined the EU, we had tax-free sales between Finland and Estonia. Before Estonia joined the EU, most people expected everything to change immediately in 2004: the cruise ferry would disappear and ships would become shuttle vessels with no big shops onboard selling liquor, tobacco and sweets, and no restaurants. Actually, quite the opposite happened.

There was at the time a big difference in alcohol taxation between Estonia and Finland, and the tax-free shops turned directly into border shops. We, and all our competitors, made the same choice: to sell products that were taxed in Estonia, and raise prices moderately to cover a part of the taxation.

The margin was naturally smaller for us per unit sold, but at the same time import restrictions were lifted and you could bring in as much alcohol as you wanted, as long as it was for your own consumption. So, what we lost in margin we gained in volume.

This was the situation for about a decade. Then, about four years ago, there were policy changes in both Estonia and Finland. The Estonian government started to gradually raise taxes on alcohol, and at the same time in Finland the government relaxed restrictions on the strength and type of alcohol that can be sold in regular stores, as opposed to the state monopoly shops for “hard alcohol.”

The real change in alcohol prices was big, but the effect on sales was even bigger, almost an overreaction: suddenly everyone “knew” there’s no point in buying alcohol in Estonia “because it’s so expensive!” In the last 18 months, we have seen a change in revenue structure on the Helsinki-Tallinn route, with drastically reduced interest in alcohol products. But before that, the Ålands-Sweden and Estonia-Finland routes were very similar.

On Helsinki-Tallinn we now have, and must have, more emphasis on ticket prices and wine & dine onboard. The shops are still very important, we shouldn’t exaggerate the change, but related to other sources of income they are not as important as before.

Despite this, we have had drastic growth in passenger volumes, especially last year. More tourists come from the rest of Europe and Asia, and that kind of passenger naturally can’t buy the same amount as the locals. If you come from Germany or China, why should you buy two cases of beer? It’s not practical to take them home.

The best lesson learned about all this is that things change, you have to adapt and you have to be fast. And naturally then it’s an advantage to be quite small. It’s not the big fish that eat the small ones – it’s the fast ones that swim away.

What about then the future of the different companies? For Eckerö Linjen, you’ve made it public that you’re looking for a replacement for the current ferry ECKERÖ…

We are! We are extremely satisfied with the operation. Naturally we will try to develop and grow, but I think we have a high saturation in the market for such a small population. A lot of them take the ferry very often. Eckerö-Grisslehamn is a fine product and operation and we have high volumes. We are very satisfied with everything and it’s very profitable – but the vessel is 40 years old, it won’t last forever!

It’s not an acute problem, there’s no hurry. We can easily use the ECKERÖ ten more years, it’s in an excellent shape and we have no complaints from the passengers about the ship… which makes the decision making very difficult. It’s very much a timing problem.

We put the ECKERÖ into operation in 2006, and she was not that young when we bought her. We have been scanning the second-hand market for the last ten years and so far we haven’t found anything better. And that means that we have slowly prepared for the possibility that we might have to build a new one.

In our business we are very much preoccupied with ships! If you visit one yard, you talk to one broker or one designer, or make some studies, everyone supposes that you will order a new ship next week. It’s a process that very easily starts living its own life.

We are still scanning the market for a replacement and we have made several studies on converting existing vessels into something suitable. At the same time, we are in a very early phase of talking to designers and engineers, and discussing internally about what kind of new ship we would build if we would build a new one? That’s not an easy question to answer – the ship needs to be planned for at least a 40-year lifespan!

What we are facing now on Eckerö Linjen is the same as what happened on Eckerö Line six years ago, when we bought the FINLANDIA. Whether we buy a second-hand vessel and convert her to our needs or order a newbuilding, both alternatives will mean a huge change in how much capital we have employed in that business.

We have a very good financial situation in the group, so if there suddenly emerges a suitable second hand vessel, that could be a fast decision. For a newbuilding, the decision not around the corner. We can still wait a couple of years.

I try to remind myself and my colleagues that it’s exactly when everything is profitable, when you have a good financial situation and a lot of cash in your treasury, that you have the possibility to do something really foolish! As we have to restrain ourselves from doing that. “Because we can afford it” is not a good reason to build a new vessel. We should build a new vessel only when we are sure we can build one which will be profitable, suitable for our market and good for our customers.

What about the future plans for the Helsinki-Tallinn line, where the FINLANDIA is currently the most popular ship on the route?

Absolutely no concrete plans for a new vessel. But we had a very successful last year, have very high load factors for both passengers and cargo… and the FINLANDIA is 18 years old, so she is not new anymore.

On the Helsinki-Tallinn route, we made a quantum leap in 2013: the FINLANDIA was a circa 100 million euro project, but what we got for the old vessels [NORDLANDIA and TRANSLANDIA] was about 10-15 percent of that. It was a really big change in terms of capital employed. Now that we have made this big leap, the next step will not be as big.

The FINLANDIA is a large, reasonably new vessel… but we have to realise that we will not keep her until she is 40 years old! If there is a good opportunity to find something a little bit newer or bigger, it will be a normal change of tonnage from something that’s good to something that’s a little bit better.

Moving on to Birka Cruises, what is the future of that company and the purpose-built cruise ship BIRKA STOCKHOLM?

Birka is much easier to talk about in a more definite manner. The BIRKA STOCKHOLM is only 15 years old and was built to almost too high quality [laughs]. She is in perfect shape, more or less like new. We will keep her forever! Or at least I will be retired before anyone has to start thinking about replacing her.

What about then your roro cargo tonnage provider company Eckerö Shipping and the future of that company after the radical fleet reduction in the past decade?

In the beginning of of the current decade, we had seven roro cargo vessels. Alongside the passenger ferry operations, the roro cargo company was was definitely a second leg, like toinen ja toinen [“second and second”] in Finnish, meaning the two are equals.

During the first half of 2008 we secured long-term charter contracts for all of our roro vessels. At the end of the year came the financial crisis, which was a dramatic change for all kinds of cargo vessels. The roro market wasn’t affected as badly as other types of cargo tonnage – “only” a 50-60 percent drop in freight rates. But we had just secured contracts for five years. We were not touched by the crisis at all!

Of course, the relationship with some of our customers were a little bit complicated when our profits were their loss, but all in all we had a safe haven from all the marker turmoil. And maybe that made us a little bit complacent. We were quite sure in 2009 and 2010 that the marker must come back, there can’t be more than four years of low rates. And now it’s been ten years. The market has improved in the last two-three years, but it’s still not even close to what it was in 2007 or 2008.

In 2012-2013 our charter contracts expired and we met totally different market conditions. As a result, we sold five of those seven roro cargo vessels during a short period of time. It was not a big, strategic decision, “now we leave it all”, and it was not ideological. It was very pragmatic: what can we expect from the market and what can we do with the ships?

During that period we of course lost a lot of asset value. That fourth quarter of 2008, when the rates went down 50 percent but our profit and loss sheet was not effected, the market value of our balance sheet was: around half of the value of the roro vessels just evaporated during a couple of weeks.

The two roros that are left [EXPORTER and SHIPPER] are employed in a time charter operation with Holmen Paper. Today, the roro segment is for us definitely a second, less important leg – or if you count the three passenger operations separately, it might even be leg number four.

We have a strong balance sheet, good financial situation, enough financial strength to support our brands. It’s not our financial strength that restrains our ability to buy new vessels. When it comes to our roro segment, there is no realistic possibility that we could grow it back to the same relative size within the group as it was before 2008. The market has changed.

We are open to new ideas and we regularly scan the market for business opportunities. Small investments are absolutely not ruled out or totally unlikely. In the roro segment, there could be all kinds of openings for cooperation. We are open for joint ventures or some kind of other cooperation for Eckerö Shipping. Something like that is very unlikely in the passenger side. We see a very independent future for our passenger operations.

The roro cargo segments is an interesting business and something different from the passenger business. We will stay there as long as there is some money to be made.

[As an indication of how fast things can move in this business, after this interview was carried out but before publication, Eckerö Shipping bought back the roro cargo vessel TRANSPORTER (sister ship to the EXPORTER and SHIPPER) that the company had sold in 2015.]

Going outside the shipping side, can you tell us briefly about your “fifth leg” company Williams Buss?

Williams is a local, small bus company with only 12 buses, which is almost totally engaged public transport on the Åland Islands. Its origins are in the 1980s, when local tourism was a much bigger part of the whole group’s business. At the time, group travel by bus was much more important for tourism than today. Now people travel more individually. We still have Williams Buss, it’s a small, profitable operation, but it’s a part of the group mainly for historical reasons.

Final question: is opening new routes a possibility for Rederi Ab Eckerö in the future?

I can’t imagine where we could start up a new passenger line. And we have never been operating a pure cargo line. But on the other hand, that doesn’t mean it couldn’t happen… I spent New Year’s Eve 1987 in Leningrad. If anyone had told me then what was going to happen in the next five years, I would have thought someone had put hallucinatory drugs in their vodka. So you should never say never! You never know what could happen around us, where there could be a new business opportunity.